In an exceptional move, the Reserve Bank of India has announced bold measures to heal the ailing Indian economy currently infected due to unprecedented corona virus. In its seventh Bi-monthly Monetary Policy Statement, 2019-20, the RBI has reduced its policy repo rate by a massive 75 basis points to 4.40 percent and the reverse repo rate by 90 basis points to 4.0 percent under RBI’s liquidity adjustment facility (LAF).
Further, the marginal standing facility (MSF) rate and the bank rate both have been reduced to 4.65 percent. After maintaining status-quo since October 4, 2019 till February 6th, 2020, the change in policy rates and other measures announced by the RBI are like a booster dose for the ailing Indian economy. Though the recent softening of retail inflation and the expected fall in international oil prices have seemingly given a breather to the RBI.
Volatility in Global Financial markets is a Major Concern
The Reserve Bank has taken cognizance of the devastating impact of the incidence of COVID-19 on financial markets particularly in the past two months. Globally, the fear-stricken investors have resorted to panic sell-offs that has led to erosion of wealth in equity markets. The fear psychic has damaged the advanced and emerging economies alike. Today, we really do not know how many of us shall be hit by it and how many of us shall survive!
Corona virus has caused severe disruption to human lives in such a sudden way that there is lack of preparedness at every level to deal with it. The pandemic is causing threat to not only the survival of the human species but also the entire Eco-system that surrounds their world! A stable financial market thrives amid conditions of predictable future, may be subject to some risk for which one can be prepared to deal with. The dynamics of financial decision making involves analysis of trends or undercurrents that can be unraveled on the basis of financial models, experience or may be just intuitions.
COVID-19 emerged in Wuhan city, initially. And Wuhan is quite an industrialized and developed city. Under normal circumstances, such viral infections are expected to be treated by the local doctors and the life moves on. No one had an inkling that it will be a black swan event of such great magnitude that thousands of precious lives would be lost and millions of healthy people would be forced to get locked into their own houses.
Travel, transport, trade, tourism, theaters, teaching, training, toiling, and practically every other kind of economic activity has come to a standstill everywhere across the globe. COVID-19 has caused a sudden threat to not only the humans, it has hurt the economy of every nation and financial markets could not be an exception.
Thanks to advances in the information and communication technology, an increasing number of activities that can be done from home. But there are still large parts of our economy that require employees to work on site such as manufacturing, construction and mining activities. Because of mass level lock down in all the states and union territories in India, labour and managers cannot reach their workplaces and so the economic activities are bound to be suspended or reduced in many industries.
Then even if factories are made to operate through any planning or arrangements, well how their produce shall reach the market place until the non-essential transport and the e-commerce logistics are blocked. In such a scenario, if interest rates are lowered, it may bring relief to both the firms and the retail borrowers. If the productive activities may not resume soon, there may be a paucity of even essential goods and it is likely that the prices may go up in breach of the RBI inflation targets. This further shall put pressure on the RBI either to maintain status quo or increase the policy rates again. Further, there is no precise way of predicting what shall be severity, spread and duration of this pandemic. With the proportions that it already has undertaken, the outlook for the global economy is likely to be bleak and there are chances that many advanced and emerging economies may slip into recession. And India would be no exception. RBI’s quick response therefore is a welcome move.
The slowdown in GDP growth rate was already a concern
According to the second advance estimates released by the National Statistics Office (NSO) in February 2020 the real GDP growth rate has been downgraded from 5% to 4.7% for the current quarter which is even below the annual estimate of 5 per cent for the year as a whole. There is an apprehension that it may further decelerate due to the corona pandemic.
However, some of the positive aspects are that agricultural production has been higher in January 2020 by 2.4% compared to the previous year, retail inflation has decreased by one percentage points recently and oil prices have subdued. Further, in the external sector, merchandise exports have registered growth after a six-month trend of deceleration. As per data published by the RBI on March 12, 2020, the CAD was a meagre 0.2 per cent of GDP. Also, there has been an upsurge in the net FDI inflows in the first 10-months period this financial year.
Will the RBI measures bring immediate respite?
The immediate effect of the RBI measures would be that substantial liquidity shall get injected into the financial system in India. Besides lowering the policy rates, the RBI has also reduced the Cash Reserve Ratio by 100 basis points from 4% to 3% for the entire year. Further, the RBI has allowed all lending institutions three-month moratorium for all term loans. All this shall help the Banks and other financial institutions meet challenges posed by COVID-19 on one hand and increase their lending capacity to industry and retail borrowers on the other.
At this moment there is a need to be patient and not to expect miracles to happen. When you are faced with difficult times even a small element of positivity is welcome. And RBI has announced no small measures. The best part is that the monetary policy measures are coinciding with a comprehensive package of ₹ 1.70 lakh crore announced by the Government of India which includes cash transfers and food security, for vulnerable sections of society.
Moreover, the RBI has given an indication that its accommodative stance shall continue so long as it is necessary to revive growth subject to consumer price index (CPI) inflation remaining at 4 per cent within a band of plus/minus 2 per cent, while supporting growth.
To conclude, the RBI has taken pre-emptive steps on war footing to deal with the corona virus attack and has responded quick to maintain liquidity and stability in India’s financial markets.